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CI Financial Corp
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Good day, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2018 Second Quarter Results Webcast. [Operator Instructions] Please take note of the cautionary language regarding forward-looking statements and non-IFRS measures on the second page of the presentation.I would now like to turn the call over to Mr. Peter Anderson, CEO of CI Financial. Mr. Anderson, you may begin.
Thanks very much, and welcome to the CI Financial Conference Call for the Second Quarter of 2018. As always, CI's Chief Financial Officer, Doug Jamieson, is with me on the call. Shortly, he'll give you a detailed financial update on our second quarter. Also available are some members of CI's executive team, who can answer any questions you have on our various businesses.The second quarter financial results of CI were solid. I'm pleased we continued to manage the company efficiently despite the challenges in our industry. Doug will provide more details, but here are some of the highlights.Q2 earnings per share reached $0.61, 3% above Q1. Free cash flow in Q2 was $163 million; $330 million year-to-date, a record for CI. Assets under management, just below $140 billion. And finally, the Sentry integration is virtually complete and we'll provide more details in a moment.CI continues to be in a strong financial position. As you review our quarterly results, you will see our overall business is going well, yet our stock price is down, and in our opinion, represents a significant buying opportunity. Asset manager multiples globally are trading at the low end of the range for a number of reasons, but mostly due to uncertainty in the industry. We believe this is an overreaction, providing us the opportunity to strategically and aggressively repurchase our stock; an opportunity we have and will continue to take advantage of.The board of CI Financial, supported by senior management, has unanimously agreed to alter CI's current allocation of free cash, shifting the balance in favor of share buybacks. Our overall strategy remains unchanged to return 100% of our free cash back to shareholders through dividends and share repurchases. Today, we have concluded CI's best use of free cash is aggressively buying back our shares. As a result, our annual dividend will now be $0.72 and paid quarterly. This brings CI's dividend closer to the average yield on the TSX Composite Index, a level we believe to be very reasonable. We cannot foresee any reason why we would look to adjust the floor in the future. This new policy provides the company increased flexibility and optionality, allowing CI the ability to pursue the best available long-term value-maximizing opportunities. I want to also remind everybody our board collectively owns more than 20 million shares of CI. They fully endorse our new plan.We have already been buying roughly $150 million in CI's stock each quarter for some time. Our new strategy will allow us the flexibility to increase our buybacks to as much as $1 billion over the next 12 months or so, if, in our opinion, our company remains undervalued. This shows clear proof of our confidence in CI Financial today and in the future. If there are sellers of our stock at these levels, we will be buyers. If, in the future, we find a better use for our free cash, we will adapt our policy again. We have the confidence in our company and the capacity to increase our debt level to a maximum of 2x net debt-to-EBITDA from its current level of 1.2x, if circumstances justify this move. We will only add to our debt if we conclude it's a best interest of CI.Since going public in 1994, we have always run CI Financial proactively, making decisions however bold in the best long-term interests of the corporation, which in turn means the best long-term interest of all of our shareholders and other stakeholders. In our opinion, there is no more compelling use of our free cash today than to aggressively buy back our shares at these prices. We will maintain this policy until we find a better use of our free cash.Switching topics; retail sales at CI Investments continues to be in redemptions. While gross sales remain strong, we are very disappointed in our Q2 net sales results. And our highest priority of the company is to return to positive net sales. Causes for these redemptions continue to be the same, short-term performance in a number of our larger funds and industry-wide redemptions in major asset classes, including Canadian equity and Canadian balanced. We continue to see positive signs though, including our strong gross sales and increasing number of new advisors using CI and improving performance in our funds. I remain totally confident that our retail strategy, our sales management and our wholesaling team want to return our retail business to positive sales.To improve our competitiveness in today's market, we are upgrading our product offerings. We recently announced several enhancements, including new prices on some funds and lower entry levels on our Preferred Pricing program. There are a number of more launches coming this fall, designed to meet the needs of various advisor channels, including IIROC, MFDA, Sun Life, Assante and Stonegate. We will also launch a new marketing campaign this fall and into 2019 to increase market awareness of CI and our various businesses.Finally, it's been 12 months since we announced the acquisition of Sentry. The integration is virtually complete and now part of CI. That being said, redemptions of the business have been higher, so we realized significantly more synergies than we originally forecast. The Sentry acquisition has definitely added to CI's earnings in both Q1 and Q2.With that, I'll hand the presentation over to Doug.
Thank you, Peter. Here we have CI's highlights on a quarter-over-quarter basis comparing Q2 to Q1. Average assets under management increased $2.4 billion or 1.7% to $139.5 billion from $141.9 billion. Assets under advisement grew 2% to $43.7 billion. Net income was $159.9 million, or $0.61 per share compared to $159 million, or $0.59 per share last quarter. Free cash flow dipped slightly to $163 million from $166.9 million last quarter, and the year-to-date total of those 2 numbers, $330 million, is a cash flow record as Peter mentioned. The main reasons for the increase in earnings were the impact to revenue of 1 additional day in the quarter, which slightly offset the lower average assets, as well [ a decrease ] in SG&A as we realized greater synergies from Sentry and BBS, while our net management fee stayed flat.Now looking at Q2 year-over-year highlights. Average assets under management were up 14% from $122.7 billion in the last year's second quarter. Net income was up 3% from an adjusted $154.6 million last year. And free cash flow grew 5% from $154.8 million. The increase in the prior year -- from the prior year is primarily due to the acquisition of Sentry boosting CI's assets under management, offset by a decline in margins as net management fees in basis points were down about 4% year-over-year and SG&A in basis points was up about 2%.I have a few final words on Sentry. We have achieved 95% of our expected synergies on the Sentry deal. The back office is scheduled to move onto CI's platform by the end of September and that will complete the integration. While the Sentry funds continue to experience net redemptions, it is providing run-rate annualized EBITDA of $130 million, which on the purchase price of $780 million is a 6x multiple. The deal has also provided accretion of over $0.04 per share each quarter this year.CI's total SG&A fell to $129.7 million in the second quarter from $135.2 million in the first quarter, and in basis points dropped to 37.3 from 38.7. This totals about $265 million for the first half of the year. We are now forecasting a 3% increase above the Q4 2017 run rate of $520 million, or about $535 million for all of 2018, and therefore, $270 million for Q3 and Q4 combined. So we are expecting to spend up to an additional $10 million in the second half of the year above our current run rate, which will include spend on new initiatives and innovation as we continue to prudently manage our costs for CI's core business while investing in technology and product development.For each of the last 5 quarters shown here, CI's quarterly free cash flow [ and some ] has been returned to shareholders. The new capital allocation policy will direct larger amounts to buybacks as we are prepared to maximize the normal course issuer bid with CI trading below 10x free cash flow. In July, CI issued $325 million of 5-year debentures and its debt capacity is now $1.925 billion comprised of [ $1.225 billion ] in public debt and a $700 million credit facility. If we can repurchase $1 billion in the next 12 months, CI's net debt-to-EBITDA only reaches 1.8x; and if it takes 18 months to repurchase that amount, the net debt-to-EBITDA ratio only hits 1.5x. This is well below our self-imposed 2x debt-to-EBITDA ceiling; a ceiling we have increased given greater flexibility we now have with free cash flow. And the new policy will de-risk the use of future free cash flow available for buybacks, as we've indicated, is our current intention, but also available for other investments or acquisitions or to pay down debt in the future.I'll now turn it back to Peter.
Thanks, Doug. Rather than taking you through all the various businesses of CI, probably we'll answer any specific questions during the Q&A. Overall, however, everything including: Assante, First Asset, CI Institutional, BBS and Grant Samuel, are all operating as we expected.In conclusion, I returned to CI roughly 2 years ago. Since that time, we have been restructuring this company to compete in a challenging environment and building CI Financial for long-term success. We are efficiently operating this business today while recognizing the impact of headwinds this industry faces. CI has a number of unique long-term advantages. We have scale, access to distribution, exceptional portfolio management and a strong sales culture. Despite the redemptions in our sales business right now, this company remains in an exceptionally strong position. To continue adding long-term value to our shareholders, like we have over the last 25 years, we are taking the necessary steps to move the company forward. Changing our free cash allocation towards share buybacks is the right strategy today. There is no better use of our free cash right now than buying shares of a company we believe is being significantly undervalued by the market. As I said earlier, we will be buyers of any available stock around these levels. We are committed to purchasing up the $1 billion of CI shares over the next 12 months or so under the right circumstances. If in the future, we see a better use for our cash flow other than buying CI stock, we will have no hesitation to change our strategy. Our management is 100% focused on building CI into a business that is competitive today and even stronger in the future.With that, I'll open the call up to questions. Operator?
[Operator Instructions] We will now take our first question from Graham Ryding.
Just wondering the new level of your appetite for debt. I thought it was 1.5x before, I think it's up to 2x now. Is that because of the dividend change? Or what's prompted the new update for leverage?
Yes, that's right, Graham. The increased flexibility we have with our free cash means we're comfortable going up to 2x debt-to-EBITDA.
Okay. The NCIB I think you have in place right now is 20 million shares. So in order to buy back up to $1 billion worth of shares, do you need to consider a substantial issuer bid? Or how should we think about that?
No, we don't have to do that. I mean, because we -- over the next 12 months, we'll be in 2 NCIBs. So we can do that. But we have -- all options are available, but we can buy $1 billion of stock over the next 12 months or so and be well within our NCIB.
We've only asked for 20 million on this NCIB, but our limit is actually 25.3 million. So we could go back and ask for the additional 5 million at any time.
Okay, got it. You mentioned increased flexibility to invest in the business. Any color on what exactly you would consider targeting the free cash flow towards if it wasn't the share buyback?
Well, aside from items inside the business that would likely end up being included in SG&A, we're certainly open to looking at investments or acquisitions in technologies or companies in the industry.
Okay. And then the last question is just the Sentry synergies, I think you said that you're above expectations. Can you quantify what you've realized versus what you were targeting?
We had initially expected, say, $75 million and we're well above that range.
Our next question is from Gary Ho from Desjardins.
Questions going back to the capital plan. Just curious what was the discussion at the board level and did you have prior discussions with investors on the idea?
Gary, it's Peter. As I said in all quarterly calls before is we always have a discussion with the board during the board meetings on capital allocation and what we do with it so that we have a common discussion. But this time we felt that to alter the strategy towards share buybacks wasn't any more compelling option or idea that the board to think of and this is a -- we think this is perfect for the company right now, and the board unanimously agreed to it. And it wasn't terribly difficult to convince the board that this was the right thing to do. They were very, very supportive of this idea.
Got it. And then, second question is on the net flow turnaround. I think in prior quarters, you got it to a turnaround to breakeven net flows by end of the year. Just given the weaker industry trends, can you give us an update on that and maybe what products are selling and which ones might not be?
Well, I can tell you what's not selling and that's anything with the word Canadian attached to it. We're seeing a lot of sales in the industry going towards global product, and so we are well positioned in that today. We have a -- we do quite a significant amount of sales in [ global product ]. It just doesn't offset the high-end redemptions that we have and the industry have in a Canadian product. So I think that answers your question.
Yes. And then on the turnaround expectations?
I guess I would expect that we won't be out of redemptions in 2018. I can safely say that. But as I said before, we are -- there is no higher priority in our company than to return to net sales within CI as fast as we can. As I said earlier, we see some really encouraging signals, including gross sales, new advisors that are doing business with CI, and performance.
And could you just elaborate like which channels in the IIROC versus MFDA or whatnot you're seeing those gross sales come in?
Well, we're seeing gross sales coming in from all of our channels. We see a lot of gross sales coming from IIROC, but we also see a lot of redemptions there as well. But we see good sales in Sun Life, we see terrific sales from Assante and Stonegate. And we also see gross sales in the activity. So we're well positioned in terms of gross sales.
Got it. And then just last thing maybe for Doug, just going back to that 2x net debt-to-EBITDA threshold. Have you had discussions with credit agencies on this and the implications on credit ratings operating at 2x?
Not specifically on 2x, it's something that they look at historically. This whole change, however, is something that they generally should be happy with and creditors happy with that. And we've reduced the amount of dividend that's being paid.
Our next question is from Geoff Kwan from RBC Capital Markets.
Just following up on Gary's question around -- on the retail side. I know you've talked about we are not going to see the turn by the end of this year, but from what you see right now in terms of visibility, do you see the signs that the net redemptions are stabilizing? Or what's your sense there?
Yes. The short answer would be yes. We do see -- the way we measure things, we do see encouraging signs. I just -- I'm not going to give you any kind of a prediction on the -- [ on one ]. All I can say to you is that I'm very encouraged of where we are, despite being incredibly disappointed this quarter, but the reality is that we are -- we see -- we had seen good gross sales, we see all the other trends going forward, and I think we see redemptions and I expect redemptions to slow down over the next [ quarter ].
Okay. The institutional side, maybe if you could give an update on where you stand on the pipeline and any color you can provide around that?
Yes, sure. I mean, in Q2, the -- we were in small redemptions with -- on the institutional side. I mean, that's a lumpy business. As you know, money comes in and certain times the money goes out. And typically, they come [ in and out ] in some size. We did have a couple of redemptions this quarter mostly for -- specifically not connected to performance. But we do have committed sales already that have not been funded yet, so we're expecting those over the next quarter or 2. And the pipeline looks good as always. I mean, we're continuing to be encouraged with our institutional business. I mean, we're short-listed on a significant number of opportunities. And our RFPs, which take much longer obviously, that number is really quite long as well. So I'm encouraged.
And then just my last question was on the July AUM numbers. Are you able to kind of talk about -- I know you talked about, but I had a question on -- in terms of stabilizing. Did the July numbers suggest that that was the case? Or just any color you can provide on the July net redemption numbers in Canadian retail?
I'm not going to provide numbers on redemptions right now, but I mean, we were still in redemptions in Q2. I think they were -- sorry, in July, but the numbers were -- I would say, were more encouraging.
Our next question is from Scott Chan from Canaccord Genuity.
Just on Australia with Grant Samuel, you had slightly positive net sales. Maybe you could just give us an update there and also with the July AUM release, I noticed that you divested Tribeca, just wondering the rationale for that as well.
Scott, the business in Australia with Grant Samuel is going well as always. They are continuing to bringing business in a number of their mandates. So that's -- that continues to be encouraging. We're launching one of our portfolio manager groups down there any time now, and so that will be the first CI product sold outside of Canada. And so we're quite excited [ about that ] and feel that that will actually have -- create some momentum down Australia for Grant Samuel. On the sale of the business in Australia, we own a fairly significant equity stake in a business called Tribeca, and management of that company approached us to take that company back to buy our shares out, and we thought it was a compelling reason to do that. It allowed us some additional flexibility in Australia, and it is something that we wanted to do that we weren't able to do as a result of a -- of the contracts that we had with that group. So we did lose about $1 billion of assets, but just as you know, they were significantly low fee. So that's the explanation there.
And Doug, just on the SG&A, it obviously came in very well this quarter. I might have missed your remarks, but did you talk about new initiatives in the fall that might add an incremental $10 million in the second half of the year to SG&A? Or I just want to kind of clarify that comment you made.
Yes, that's what I indicated that second half of the year SG&A would likely be up $10 million or so from our Q2 rate and part of that will be towards new initiative.
$10 million higher than the Q2 rate, okay.
Our next question is from Graham Ryding from TD Securities.
Good. Gentlemen, all my questions answered.
Our next question is from Paul Holden at CIBC.
So when you look at the net redemption situation in recent quarters and you think about product shelf and fund returns, do you think they are all about diversification of the product shelf in terms of you have a lot different [ pods ] but it seems like there's some overlap in terms of style? Are there some diversification opportunities here?
Yes, I think you're right there. I mean, we're doing a complete evaluation of our product shelf today. I think we certainly have a host of fund managers and products that in some way can be confusing. So we're looking at that, but we're also diversifying our product lineup as well. We think there are gaps in this space not just in terms of style but we just see gaps that we can fill. The example would be the alternative product [indiscernible] that are going to come out of the fall. We're definitely going to be there. We think there is a market for that and that's just one [ among ] a host of things that we're looking at. We're going to enhance the product lineup with our Assante and Stonegate. There will be another one I don't want to get into much details, and there's a few other things that we're going to bring out between now and the end of the year that we think set the interest of all our different types of advisors.
Okay. And then, when you think about those gaps whether it's alternative client or other, what do you think is the best solution to fill those gaps? Is it something we have to go out and buy? Is it something you think you can build organically? Is it something regarding higher [ UPMs ] and analysts?
I think the simplest way to answer that is, all of those.
Just kind of depend on the situation, okay. And then, as you think about sales channels, again, in the context of recent quarter and net redemptions, is there a strategic action you can take on that front to improve the trajectory of net sales? So more than just simply having more wholesalers and pushing harder in certain channels, are there things you can do in terms of capital allocation or partnerships more things of that type of nature?
I mean, look -- yes. I mean, look, there is -- as I said earlier, I mean there is no more -- no [ larger ] priority, more important priority, and CI [indiscernible] net sales. So we're looking at all of those. I mean, we are -- as I said earlier, we're continuing to build us a business. We are investing in the sales business not only with people but with technology. We're building our product lineup. We've changed the compensation of our salespeople to be more direct driven, focused on activity. We are always looking for new distribution channels, always, not only in Canada but abroad. And we look for relationships everywhere we can find. And so we are being incredibly proactive in this business, and it has paid off in the past, it's is paying off today, and I think it'll pay off in the future.
Our next question comes from Tom MacKinnon from BMO Capital Markets.
Just -- I got on the call later, [ there was ] another call, so maybe the question has been asked before, but I think when you were in your discussions with the board with the respect to the dividend cuts, obviously the business is under a lot of pressure and you're giving money back to shareholders here and trying to buy your way into growth as well, but you still continue to have problems with respect to flows here. What have been the strategy discussions here in terms of trying to right the ship with respect to flows? And are you still kind of looking at a run rate of being neutral in terms of net flows by the end of the year? And where are the outflows coming at? And just are they IIROC, Sentry related? A little bit more color there.
[indiscernible] I'll start from the top and then Doug can jump in if he wants. But first and foremost, I just want to make sure everybody understands that the decision that we made on capital allocation has absolutely no bearing on redemptions or anything about our business. Quite simply, and I can't say it more directly, is that we do not see any more compelling use of our free cash today than buying back our stock. That's plain and simple. So that's what's left. In terms of going to the redemption side, as I said earlier, is we do see our largest redemptions are on the IIROC side and we're working on that to build out. But we are -- and we're very confident that our strategy, our sales team and our sales management will get us to the positive sales in the future. And I think your last question was the -- by the end of the year, and I said, I don't expect it to be by the end of the year.
And when would you expect that to be and why is it taking longer than you would have expected?
Remember, the industry is in redemption in the second quarter as well. I mean, so -- I mean, that's one of the challenges as well. I think there's -- I don't want to get into all the reasons, but I think we've talked about it before. But -- and I'm not going to predict when we're going to get out of redemptions, but I just again say that we are totally focused on those and it's our highest priority.
And in terms of -- is there any specifics with respect to the strategy? I mean, you talk about a new campaign, and I think you've talked about enhancing the product line. But is there anything that you can give us in terms of specifics? Because this is a type of business where there's always campaigns and there's always enhanced products.
Well, I mean, look, this is a business -- a company that has an incredibly strong sales culture. And we have a significantly large sales team. We're investing more into our sales team today than we ever have through technology, through -- actually the size and the scale. We do think the more contact we have with advisors the better redemption we're seeing. We're seeing the results of that today. We're seeing our gross sales are continuing to be as strong as they can be. And that's a great signal to the future of our business. Our challenge, again, [ was factored in as ] 3 really key things: One is the industry; #2 is performance of some of our larger funds; and #3 is the fact that we have a lot of assets in asset classes that today are out of favor, and that would be Canadian equity and Canadian balanced. That's plain and simple.
Yes. And finally, just with respect to SG&A, a little bit better than we were looking for. Is this -- is anything driving that in the quarter and is this kind of level sustainable?
Yes. I mean, in my comments, I gave a little color that we achieved good synergies with -- on the Sentry side in the second quarter. We continue to manage our costs well on the core business. And in the second half of the year, we're going to invest more into technology and new initiatives.
And so the run rate -- how would we look at your expenses in second quarter of, say, 2019 versus the second quarter of 2018? What kind of rate of increase should we -- would you feel comfortable...
Well, I've given a little -- yes, I've given a little guidance for the second half of this year only and I'm targeting $270 million in the second half of the year.
Thank you. It appears there are no more questions at this time. I'd like to hand it back to you, Mr. Anderson, for any additional or closing remarks. Please go ahead.
Okay. Thanks, everybody, and I very much appreciate you all being on the call. We're around all day if there are any more questions. But I do appreciate the -- you spending some time with us, and we'll see you in the next quarter. Thanks so much.
Thank you. This marks the end of today's conference. We appreciate your participation, and you may now disconnect.